Evergrande Creditors Demand Further Explanation For Billions In Seized Cash

A group of offshore creditors to China Evergrande Group are demanding additional information about the seizure of nearly $2.8 billion by local banks that could explain how the troubled property developer pledged the funds without investors’ knowledge, according to people familiar with the matter.

Last Friday, Evergrande released the preliminary results of an investigation into the missing funds pledged as security for loans by an offshore subsidiary that manages Evergrande-built properties. Evergrande also announced last week that it ousted its longstanding chief executive officer, Xia Haijun, and its finance chief, Pan Darong, over their involvement in the arrangements, as well as four executives from Evergrande and its subsidiary.

However, some creditors don’t believe that the company sufficiently explained how the funds were guaranteed to banks without any form of disclosure to investors, and they haven’t received any explanation beyond what the company has said publicly about the seized cash, people familiar with the matter said.

This week, a group of Evergrande’s largest offshore creditors, which own secured debt backed by assets at the subsidiary, wrote to the company requesting additional information on which executives were directly responsible for the pledges, which banks enforced their claims on the assets and how the company specifically plans to compensate them for the lost funds, which represent most of the subsidiary’s cash, the people said.

The continuing tension between Evergrande and its foreign creditors highlights how Evergrande has struggled to meet investors’ demands for transparency nearly eight months since it defaulted on its foreign debts and just days before the anticipated release of a restructuring plan the company promised to deliver by the end of this month.

Evergrande and advisers to the company’s offshore creditors didn’t return requests seeking comment.

Last week, Evergrande published preliminary details related to its investigation of 13.4 billion yuan (about $2.8 billion) in cash pledges at its Hong Kong-listed property management unit, Evergrande Property Services Group Ltd., which guaranteed third-party borrowings diverted to the parent company.

Banks later seized the funds, which were used to help finance the parent company’s general operations from late 2020 until the end of 2021, when the third-party borrower failed to repay the debt, according to the report.

The seized funds constitute more than 90% of the property service arm’s 14.03 billion yuan cash holdings as of June 30, 2021, according to the subsidiary’s interim statement.

“It seems to me that Evergrande has leveraged the majority of cash in the service arm to feed the parent company,” said Iris Chen, a credit analyst at Nomura International Hong Kong Ltd.

“Given that the service arm is a key asset that is directly held by the parent group, the misuse of cash will hurt the valuation of the service arm and therefore impact the recovery value of the parent company’s offshore bonds,” she said.

Analysts and investors said the incident will likely weigh on investors’ ultimate recoveries in a debt restructuring and underscores longstanding transparency concerns raised by Evergrande’s offshore creditors. The company and bondholders have sparred in the past over inadequate disclosures, and foreign bondholders have previously threatened to sue or liquidate the company for failing to engage with them.

“From the disclosure, one can see the poor corporate governance of Evergrande in the past, and the type of off-balance sheet debt arrangement it made, which negatively impacts bondholders’ overall recovery,” said Michel Lowy, co-founder and CEO at SC Lowy, a Hong Kong-based high-yield and distressed-debt manager.

Evergrande, the world’s most indebted developer with more than $500 billion in liabilities, defaulted on its U.S. dollar bonds in December after monthslong liquidity problems, and its Hong Kong-listed shares have been suspended since March.

The company’s debt restructuring is progressing amid a property crisis in China, where crackdowns on excessive borrowings have led to real-estate developer defaults and stalled housing projects. Outraged by long-overdue construction projects, home buyers have threatened to stop mortgage payments on unfinished apartments.

Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: July 27, 2022.